'Wiped out': Hedge fund assets could drop by 30%

A new report out from Boston Consulting Group plots three possible scenarios for hedge funds for the period until 2020. In the worst case scenario, BCG predicts industry-wide assets could shrink by as much as 30% and margins could fall by 20% as a result of fee reductions and increased capital expenditure.

In that scenario, performance would be similar to that of 2015 and 2016. Hedge funds on the whole returned about 3% last year, according to BCG, a period where the stock market hit all time highs.

“In the most dire scenario, disruption, the structure of the market would be wholly transformed and hedge funds would suffer significant reductions in AuM, margins, and employee compensation,” BCG said.

In this scenario, very large players and niche players would win out, “and a large portion of the middle of the market [will be] wiped out.”

A copy of the relevant table from BCG is below. You can check out the full BCG report here.

Even in the momentum scenario, hedge funds will have to retool, according to BCG. “The hedge fund of the future will need to do things differently,” the report said.

The report set out a number of steps hedge funds should take, including putting an increased focus on their clients, and improving their operating model. In addition, BCG suggests hedge funds “embrace the technology revolution,” and change how they source technology and talent. The report said:

“Sourcing. Hedge funds will need larger “intelligence teams” to gain access to the best ideas and skills. They should build new partnership models to develop or source technology, often collaborating with tech companies or other investment managers that might otherwise become competitors.”

“Talent. The traditional hedge fund talent model is poorly suited to attracting, developing, and retaining technology talent. Hedge funds need a new value proposition for employees, complete with a new breed of manager, a tech-style working environment, and even a tech-heavy location such as the West Coast. Hedge funds must become more team based and less founder driven, with a culture that encourages innovation.”